Japan's Softbank snaps up Sprint in $20 billion deal

October 16, 2012|Mari Saito and Tim Kelly and Nicola Leske | Reuters

(Toru Hanai Reuters, REUTERS)

(Reuters) - Japanese mobile operator Softbank Corp said it will buy about 70 percent of Sprint Nextel Corp for $20.1 billion, giving Softbank the American toehold it has long desired and Sprint the capital to expand its network and potentially buy peers.

The deal for the third-largest U.S. wireless carrier represents the most a Japanese firm has spent on an overseas acquisition.

Announced by Softbank's billionaire founder and chief Masayoshi Son and Sprint Chief Executive Dan Hesse at a packed news conference in Tokyo on Monday, the transaction gives Softbank entry into a U.S. market that is still growing, while Japan's market is stagnating.

Part of the deal involves a direct infusion of billions of dollars into Sprint, giving it the firepower to buy peers and build out its 4G network to compete in a market dominated by AT&T Inc and Verizon Wireless.

Shares in one of those potential targets, Clearwire Corp, surged 12 percent to $2.60 in afternoon trading. Sprint owns 48 percent of Clearwire, and while Softbank said no action was required, most analysts and investors see a Sprint-Clearwire tie-up as an inevitable consequence of the Softbank deal.

One way or another, analysts have long said the U.S. telecommunications industry needed to consolidate, but few looked to Japan as a catalyst. Some investors and rating agencies worried that Softbank is biting off more than it can chew.

But the 55-year-old Son, a rare risk-taker in Japan's often cautious business circles, is betting U.S. growth can offer relief from cut-throat competition in Japan's saturated mobile market. Combined, Softbank and Sprint will have 96 million users.

"It could be safe if you do nothing, and our challenge in the U.S. is not going to be easy at all. We must enter a new market, one with a different culture, and we must start again from zero after all we have built," Son told the news conference.

"But not taking this challenge will be a bigger risk."

FIREPOWER

The financing is highly complex, involving at least three steps with two entities as well as a debt conversion.

Softbank's newly created U.S. subsidiary New Sprint will buy $3.1 billion in old Sprint convertible bonds to start. After shareholders and regulators approve the proposed deal, Softbank will then buy $4.9 billion in New Sprint shares. The two together represent the $8 billion infusion directly into Sprint.

On top of that, 55 percent of existing Sprint shares would be exchanged for $7.30 per share in cash, representing a further $12.1 billion. A source close to the matter, who declined to be named publicly, said shareholders would actually be offered a choice between taking the cash or shares in the new company - though there will be caps in place so Softbank would not pay out more cash or give up more stock than planned.

The transactions are to be completed by mid-2013, at which point New Sprint will be a publicly traded company and the old Sprint will survive as its subsidiary.

A second person familiar with the negotiations told Reuters that one reason for the deal's complex structure, and for the use of the convertible debt, was the desire to infuse some capital into Sprint in short order without having to wait for regulatory approvals for the full investment.

Sprint fell 1.3 percent to $5.65 in afternoon trading after surging last week on the first reports of a pending deal. The offer, while a substantial premium, is still less than some observers had hoped. A fund manager at T. Rowe Price, a top-15 Sprint shareholder, told Reuters last week he thought Sprint would be worth $10 a share in 18 months.

Hesse, who will stay on as Sprint CEO, said the Softbank investment would give Sprint opportunities it hadn't had since he joined the firm in late-2007, and enable the U.S. firm to play a bigger role in future market consolidation.

"This is pro-competitive and pro-consumer in the U.S. because it creates a stronger No. 3 ... it competes with the duopoly of AT&T and Verizon," he said.

Hesse, one of the few corporate CEOs in America to star in his own company's commercials, also acknowledged the financial challenges Sprint has faced -- which the new capital could fix quickly.

"Sprint has been engaged in turnaround since 2008. We have been at a disadvantage due to our debt," he said on an investor call Monday morning.

But it was not all serious, as the American took some time for a bit of levity with his Asian counterparts. At the press conference, Hesse noted it was the first time he had seen his long-time acquaintance Son with a tie on.

Later in the day, Hesse sent a note to Sprint staff, listing the positives of the deal, while directors held calls with their various units to talk about what Sprint could do faster or better - like its network build-out - with the extra capital.